When Can You Deduct Car Loan Interest?

Car loan interest represents the finance charge paid when borrowing money to purchase a vehicle. For the majority of individuals, interest paid on a car loan for personal use is not eligible for a tax deduction. However, there are specific, limited circumstances where this interest may be deductible, depending on how the vehicle is used or how its purchase was financed. This article details the general tax rules regarding interest deductions and explores the particular situations where car loan interest could provide a tax benefit.

General Principles of Car Loan Interest Deductions

The Internal Revenue Service (IRS) categorizes interest into personal, business, investment, and qualified residence interest. Under current tax law, personal interest is not deductible. This includes interest paid on personal car loans, credit card balances for personal expenses, and other consumer loans.

The distinction between personal interest and other types of interest is key to understanding deductibility. Interest paid on money borrowed for business purposes, to acquire investments, or for a qualified residence may be deductible under specific conditions. For a car loan, the primary determinant of deductibility relates to the vehicle’s purpose rather than the loan itself.

The One Big Beautiful Bill Act introduced a temporary exception for certain personal use vehicles. Effective for tax years 2025 through 2028, this provision allows individuals to deduct a portion of interest paid on loans used to purchase qualified new vehicles for personal use, subject to specific criteria.

When Car Loan Interest Becomes Deductible

Business Use

Interest paid on a car loan can be deductible if the vehicle is used for business purposes. This applies to self-employed individuals, independent contractors, or business owners who use the vehicle for their trade or business. The deduction is proportional to the percentage of time the car is used for business activities. For example, if a vehicle is used 60% for business and 40% for personal travel, only 60% of the car loan interest would be deductible.

To claim this deduction, taxpayers choose between two methods for calculating vehicle expenses: the standard mileage rate or the actual expense method. If electing the actual expense method, deductible items include gasoline, oil, repairs, insurance, registration fees, and a portion of the car loan interest. A proportional amount of business-related interest may also be deductible even when using the standard mileage rate.

Home Equity Loan for Car Purchase

Interest on a home equity loan or line of credit (HELOC) used to purchase a car may be deductible under specific circumstances related to the Tax Cuts and Jobs Act (TCJA) of 2017. For loans taken out before December 15, 2017, the interest may be deductible as qualified residence interest, regardless of how the funds were used, up to certain debt limits. This includes a combined limit of $1 million ($500,000 if married filing separately) for home acquisition debt and home equity debt.

For home equity loans or HELOCs taken out after December 15, 2017, the interest is deductible only if the loan proceeds are used to “buy, build, or substantially improve” the home that secures the loan. If a home equity loan taken after this date was used solely to purchase a car, the interest would not be deductible. The One Big Beautiful Bill Act made these TCJA limitations permanent, meaning the purpose restriction and the lower debt limits of $750,000 ($375,000 if married filing separately) for combined qualified residence debt continue indefinitely.

New Personal Use Car Loan Interest Deduction

A new temporary deduction for interest paid on personal use car loans is available for tax years 2025 through 2028 under the One Big Beautiful Bill Act. To qualify, the loan must have been originated after December 31, 2024, and used to purchase a new vehicle. The original use of the vehicle must begin with the taxpayer, and it be secured by a lien on the vehicle.

The vehicle must be a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. The vehicle must have undergone final assembly in the United States. The maximum annual deduction for this personal car loan interest is $10,000. This deduction begins to phase out for taxpayers with a modified adjusted gross income exceeding $100,000 for single filers and $200,000 for joint filers. This deduction is available to both itemizing and non-itemizing taxpayers.

Documentation and Claiming Your Deduction

Accurate record keeping is important when claiming car loan interest deductions. For business use, maintaining a detailed mileage log is necessary. This log should include the date of each trip, the business purpose, the destination, and the starting and ending odometer readings. Receipts for other vehicle expenses, such as fuel, maintenance, and insurance, should be kept. These records help substantiate the business-use percentage of the vehicle.

Loan statements, particularly Form 1098, “Mortgage Interest Statement,” are important for documenting interest paid. Some lenders may provide similar statements for large vehicle loans or home equity loans. If a Form 1098 is not provided, annual summaries from the lender showing the total interest paid for the year are necessary. For home equity loans, receipts and invoices proving the funds were used to buy, build, or substantially improve the home are required.

Calculating the deductible amount for business use involves determining the business-use percentage of the vehicle. This is calculated by dividing the business miles driven by the total miles driven for the year. The car loan interest paid is then multiplied by this percentage to arrive at the deductible amount. For instance, if $1,500 in interest was paid and the car was used 70% for business, $1,050 would be deductible.

Self-employed individuals report deductible business vehicle expenses, including car loan interest, on Schedule C (Form 1040), “Profit or Loss From Business (Sole Proprietorship).” The interest is entered under an interest expense category on this form. Home mortgage interest, including qualified home equity loan interest, is reported on Schedule A (Form 1040), “Itemized Deductions,” if the taxpayer itemizes deductions. For the temporary personal use car loan interest deduction, the VIN of the qualified vehicle must be included on the tax return.